Ideally, the best growth stocks do three things well. They get bigger, they make more money, and they improve their competitive position.
UK money transfer fintech Wise (LSE:WISE) has been doing all three lately and there could well be more to come. I think it’s a stock growth investors should have on their radars.
Growth
Arguably the most important thing when it comes to growth stocks is – well – growth. And according to its latest trading update, Wise has been doing a pretty good job of this lately.
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Between April and September, the number of active customers on its platform increased by 25%. The total volume of payments it processed also grew from £57.4bn to £68.4bn.
Importantly, Wise estimates that it facilitates less than 5% of the total cash moved across borders. Furthermore, that market has been growing at 19% per year since 2022.
In other words, the company is in a strong position for growth. It’s in an industry that is expanding and it has a lot of scope to increase its share of that market.
Making money
In terms of making more money, the firm is also doing well. The latest update reported 54% growth in earnings per share, but things aren’t quite as straightforward as this.
Wise has two sources of income. One comes from charging fees to facilitate transfers – this is the core part of the business and operating profits in this division grew 19%.
The company also makes money by earning interest on the cash held in its accounts. This grew at 49%, but this is something investors should be very wary of.
There’s a real risk this will subside if interest rates keep falling. So I wouldn’t count on this going forward when thinking about whether or not to buy the stock.
Competitive position
The increase in the number of people using Wise is significant for another reason besides growth. It enhances the company’s competitive position.
In simple terms, as the firm grows, it becomes increasingly convenient for people to use the platform for their payment transfers. And this helps it recruit even more customers.
Wise isn’t just about convenience – the firm also aims to be faster and cheaper than its rivals. But having more people connected to its network improves its product.
With the company’s market share still small, the network effect that protects the business still has a way to go. But 25% customer growth indicates things are moving in the right direction.
A stock to buy?
Wise has a market cap of around £8bn. The question is whether that’s too much to pay for £147m in underlying profit during the first half of the year – I’m not sure.
As Warren Buffett says, a buying opportunity should be something that screams out. Wise isn’t quite in that position for me yet, but it’s definitely one that I’ll be keeping an eye on.
